Why Financial Accounting?

What is Financial Accounting?

• Financial accounting is a specific branch of accounting involving a
process of recording, summarizing, and reporting the myriad of
transactions resulting from business operations over a period of time.
These transactions are summarized in the preparation of financial
statements—including the balance sheet, income statement, and
cash flow statement—that record a company’s operating
performance over a specified period.
What are the various branches of
Accounting?
• Financial Accounting
• Cost Accounting
• Management Accounting
Fundamental accounting assumptions
• Going Concern
• Consistency
• Accrual
Tata Steel

Due to the Cyclicality demand of steel

across the Globe, the Revenue has
gone down Due to the cyclical demand
for steel across the Globe, the revenue
has decreased from ₹149130.36 Cr in
FY14 to ₹112826.89 Cr in FY17, and so
has the profitability (from ₹3663.97 Cr
in FY14 to a net loss of ₹ -4176.22 Cr).
However, the margin has remained
robust, but the bottom line got slashed
due to higher Finance costs (INR
4336.83 Cr in FY14 to INR 5072.2 Cr.)
and specific exceptional loss.
Significance
• The going concern concept accounting reveals the true financial integrity of an organization. It is an action an
organization conducts to ensure a clearer picture of their financial and growth related concerns.
• As per the going concern concept in accounting standards, financial statements reveal the business’s ‘true and fair value,’
again when the sale of assets does not question the company’s capability. Shut down of unprofitable branches, units, etc.,
does not imply that the concern has stopped performing well until and unless there has been a net loss and reduction
in Shareholders fund. Thus, the red flags can be summed up as follows: –
• The inability of a business organization to pay its obligations despite sufficient restructuring. Despite several steps taken
by the management, if the business fails to drive profits and there has been the exclusion of top-level management,
shareholders might think of an exit.
• Audited reports with full financial statements are published yearly, whereas only income statement data are published
quarterly. When accountants and Auditors questions about the operational efficiency of its Long-term assets, while to meet
its dues, the Assets are being sold.
• Unable to report financials within a stipulated time frame is a question for the management. There must be instances where
the administration has not given the business the ‘true and fair value to the auditors. The auditors generally examine the
profitability, loan-paying ability, operating and non-operating profits, and company losses. Continuous losses (where other
firms are generating profits in the same segment), loan defaults, and lawsuits against the company raise questions regarding
the company’s performance.
Frequently Asked Questions (FAQs)
• What does the GAAP principle of going concern concept mean?The going concern
concept is a fundamental accounting principle. In addition, it considers that during and
beyond the following fiscal period, a company may complete the current plans, utilize the
existing assets, and carries on to satisfy the economic responsibilities
• What is the importance of the going concern concept?The going concern concept is
crucial for calculating how much a company should lessen its expenses or sell its assets.
Moreover, it aids the company in delaying a few prepaid payments until future accounting
periods. So, this concept enables the company to use its assets effectively.
• When is the going concern concept not appropriate?IAS 1 mentions that the going
concern preparation basis is inappropriate if the management decides to liquidate the
entity or stop trading and also if it has no realistic option but to do so
• Which valuation method is based on the going concern concept?The market, cost, and
income are the three classic approaches to valuation methods based on going concern
valuation.
 Consistency Assumption
• All entities need to follow accounting policies and principles consistently. As consistency is one of
the fundamental accounting assumptions unless the change in accounting policies is disclosed, it is
assumed that all accounting policies followed last year are followed in the current year.
Consistency makes the financial statements comparable, and it also gives ease in the preparation of
accounts. It is used in all industries, whether manufacturing, trading, or service industry.
• It is important in every industry as it makes sure that accounting policies and assumptions are
followed continuously. If accounting policies or assumptions change every year, it confuses the
accountants and users of financial statements also get diverted due to heavy fluctuations in profits.
• This principle is important from both the accounting and auditing point of view as the following
consistency gives accountants ease in recording business transactions. For auditors, it helps
compare financial statements with last year.
• For shareholders and stakeholders, the consistency principle is important as it gives them the
satisfaction that financial statements are more accurate and reliable. The correctness of a decision
depends on the accuracy of financial information and the proper presentation of financial
statements.
Advantages
• Ease in Audit and Accounts: It helps accountants record the accounting
transactions and deal with the accounts. It helps the auditors compare the financial
statements and provides the basis for the reliability of financial statements.
• Ease for Management: When accounting principles and estimates are applied
consistently, management becomes familiar with the accounting procedures,
technologies, treatments, and their effects and helps in proper decision making.
• Reduce the Cost of Training: If accounting principles are followed consistently,
then only initial training is to be provided to the accounting staff, reducing the
training cost.
• Makes the Financial Statements Comparable: By following the principle of
consistency, the financial statements make the comparison, and it helps the
auditors and users of financial statements compare financial statements.
Disadvantages:
• Restrict to Follow the same Accounting Policies and Assumptions: This
restricts the management to follow the same principles and assumptions over the
years, and due to changes in technology, situations demand the change in
accounting, but this principle restricts the same.
• Judgment Errors: As the Principle of consistency is based on whether change
gives a better presentation in accounts, critical errors and problems arise.
• Changes Permitted: Only when the new method is considered better and gives a
better presentation in accounts. The change and its effect on profit to be disclosed
in the financial statements creates lots of calculations and pressure on accounting
staff.
 Accrual Concept
• An accrual is a journal entry that is used to recognize revenues and expenses that
have been earned or consumed, respectively, and for which the related cash
amounts have not yet been received or paid out. Accruals are needed to ensure that
all revenues and expenses are recognized within the correct reporting period,
irrespective of the timing of the related cash flows. Without accruals, the amount
of revenue, expense, and profit or loss in a period will not necessarily reflect the
actual level of economic activity within a business.
• Accruals are a key part of the closing process used to create financial statements
under the accrual basis of accounting; without accruals, financial statements are
considerably less accurate.
DAY - 2
 Accounting Principles, Concepts & Conventions
• Accounting principles are the rules and guidelines that companies and other bodies
must follow when reporting financial data. These rules make it easier to examine
financial data by standardizing the terms and methods that accountants must use.

• The International Financial Reporting Standards (IFRS) is the most widely used
set of accounting principles, with adoption in 167 jurisdictions. The United States
uses a separate set of accounting principles, known as generally accepted
accounting principles (GAAP).
• International Financial Reporting Standards (IFRS) Foundation. “Who Uses IFRS
Accounting Standards?”
What Are the Basic Accounting Principles?
• Accrual principle
• Conservatism principle
• Consistency principle
• Cost principle
• Economic entity principle
• Full disclosure principle
• Going concern principle
• Matching principle
• Materiality principle
• Monetary unit principle
• Reliability principle
• Revenue recognition principle
• Time period principle
What are the Objectives of the Accounting Concept?

• The primary aim of accounting is to maintain uniformity and regularity in the

preparation of accounting statements.
• Accounting concepts act as an underlying principle that helps accountants in the
preparation and maintenance of business records.
• It aims to understand the business rules and regulations that are required to be
followed by all types of business entities, and hence simplifying the detailed and
comparable financial information.
 ACCOUNTING CONCEPT

Business entity concept

Money measurement concept
Accounting period concept
Accounting cost concept
Dual aspect concept
Matching concept
Realisation concept
Accrual concept
Going concern concept
 ACCOUNTING CONVENTIONS

Accounting Conventions is a practice adopted by an entity based on a general agreement between the
accounting agencies and assisting the accountant during the preparation of the Company's financial statements.
To improve the quality of financial information, international financial institutions may alter or modify any
accounting conventions.
The following essential accounting concepts and conventions are presented below:
• Convention of Consistency: The financial statements can only be matched if the company consistently
follows the accounting policies during the period. However, modifications can be carried out in exceptional
circumstances.
• Convention of Disclosure: This policy states that the financial statements should be qualified to disclose all
relevant information to users to assist them in making informed decisions.
• Convention of Conservatism: The conference says the firm should not expect income and profit but provide
for all costs and losses.
Books of accounts ― book and paper and ―book or paper include books of account, deeds, vouchers,
writings, documents, minutes and registers maintained on paper or in electronic form;

“Books of Account” includes records maintained in respect of—

(i) All sums of money received and expended by a company and matters in
relation to which the receipts and expenditure take place;
(ii) All sales and purchases of goods and services by the company;
(iii) The assets and liabilities of the company; and
(iv) The items of cost as may be prescribed under section 148 in the case of a
company which belongs to any class of companies specified under that section
Books of accounts
• Sub-section (1) of section 128 of the Act provides that every company is required to
prepare and keep at its registered office books of accounts and other relevant books and
financial statements for every financial year including that of branch office(s), the books
are to be maintained on accrual basis and according to double entry books of accounting.
• Further proviso to sub-section (1) of section 128 provides that a Company may keep such
books of accounts in electronic mode in such manner as may be prescribed. The manner
of maintaining the books of accounts includes electronic mode (along with filling of the
details of the service providers with its IP Address, Location of servers etc). In case of
accounts are maintained in electronic mode outside India, it is required to maintain a
backup server physically located in India.
• As per section 148 of the Companies Act, 2013 the Central Government may, by order,
direct such companies to maintain such other additional books such as cost records for
maintenance and utilization of cost in consultation with the Institute of Cost Accounts of
India (formerly the Institute of Cost and Works Accountants of India).
Books of accounts
• The books of account and other books and papers maintained by the company within India shall be
open for inspection at the registered office of the company or at such other place in India by any
director during business hours, and in the case of financial information, if any, maintained outside
the country, copies of such financial information shall be maintained and produced for inspection
by any director subject to such conditions as may be prescribed.
• The books of account of every company relating to a period of not less than eight financial years
immediately preceding a financial year, or where the company had been in existence for a period
less than eight years, in respect of all the preceding years together with the vouchers relevant to
any entry in such books of account shall be kept in good order.
• If the managing director, the whole-time director in charge of finance, the Chief Financial Officer
or any other person of a company charged by the Board with the duty of complying with the
provisions of this section, contravenes such provisions, such managing director, whole-time
director in charge of finance, Chief Financial officer or such other person of the company shall be
punishable with imprisonment for a term which may extend to one year or with fine which shall
not be less than fifty thousand rupees but which may extend to five lakh rupees or with both.
The Financial Statement of the company should
include:
• Balance Sheet of the company at the end of every financial year.
• Cash flow statement of the company for the financial year.
• Profit & Loss accounts or income & expenditure account at the end of
the financial year in case of NPO.
• The statement that shows changes in equity in case if imposed.
• Explanatory note carrying part of any documents specific in above all
clauses.